How an oil company would turn bond offering documents against California governments

LOS ANGELES — ExxonMobil is citing California local governments' bond documents as it tries to turn the table on lawsuits the communities filed against the energy giant.

ExxonMobil filed a countersuit Tuesday afternoon in the district court of Tarrant County, Texas to defend against climate change lawsuits brought by the California governments.

In the countersuit, the oil company's attorneys alleged that contradictions between the municipalities' bond documents and their lawsuits against oil companies could equal securities fraud.

If what the cities and counties allege in the lawsuits is true, they have committed securities fraud for failure to disclose, ExxonMobil argues. Conversely, the argument goes, if the language in the bond documents was true, then the lawsuits against the oil companies are frivolous.

ExxonMobil filed a countersuit in Texas against California local governments.
Bloomberg News

“In those lawsuits, each of the municipalities warned that imminent sea level rise presented a substantial threat to its jurisdiction and laid blame for this purported injury at the feet of energy companies,” according to ExxonMobil’s lawsuit. “Notwithstanding their claims of imminent, allegedly near-certain harm, none of the municipalities disclosed to investors such risk in their respective bond offerings, which collectively net over $8 billion for these local governments over the last 27 years.”

The countersuit “is an outrageous abuse of the legal process that seeks to limit the ability of law enforcement and local government to protect their residents,” said John Cote, a spokesman for San Francisco City Attorney Dennis Herrera.

“It is an attempted end-run around the California courts that have jurisdiction in this matter,” Cote said.

San Francisco and Oakland filed lawsuits in state superior courts in San Francisco and Alameda counties Sept. 20 seeking billions of dollars in damages to pay for infrastructure to protect coastal cities from potential damages caused by rising sea levels. The city and the county of Santa Cruz, San Mateo County, the city of Imperial Beach and Marin County were also named in ExxonMobil’s lawsuit.

Scientists have linked rising sea levels and warming global temperatures to the burning of fossil fuels.

An excerpt from an San Francisco bond document cited in the countersuit says the city is “unable to predict” when natural events such as sea rise or other impact of climate change such as flooding may occur or “whether they will have a material adverse effect on the business operations or financial condition of the city or the local economy.”

In the lawsuit brought by the cities, attorneys argue that San Francisco's plans to fortify the seawall will cost upward of $500 million for short-term upgrades.

Cote noted that bond documents for San Francisco's October 2017 sale do cite climate change and rising sea levels as a risk factor. The bond documents estimate that up to $62 billion in assets including roads, schools, hospitals would be at risk from a 100-year flood.

The governments' lawsuits argue that the companies knew or should have known about the potential impacts of burning fossil fuels, but instead have made efforts to discredit the science behind global warming.

ExxonMobil denies the allegations in the countersuit noting that they signed the Paris Agreement of 2015 that outlines efforts to mitigate greenhouse gas emissions, but the company’s attorneys also argue that the city’s lawsuits are efforts “to coerce ExxonMobil and others operating in the Texas energy sector to adopt policies aligned with those favored by local politicians in California.”

The cities and counties have filed suit against Exxon and 17 other energy companies.

“This does appear to be a novel type of claim in terms of municipal disclosure,” said Lisa Quateman, a managing partner with law firm Polsinelli. “The [local governments] should include people on the counsel team who are familiar with the municipal market, because of the nature of the claims.”

The case underscores the need for municipalities to focus very clearly on the consistency in their public statements, said a bond counsel attorney, who declined to be named.

An argument could be made, however, that statements made in litigation are privileged, while the statements in bond documents are considered public statements, according to the attorney.

There could also be a timing issue between when statements were made in bond documents relative to the evolution of comprehension around the impacts of global warming, the attorney said.

The trend among bond counsel now is to establish working groups to make sure the bond documents don’t contain material misstatements.

Assuming the claims by Exxon’s attorneys are true, there might have been a disconnect between the person who came up with the statistics for the lawsuit and the group that worked on the bond documents, the attorney said.

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